Alcohol Beverages Taxes: Distilled Spirits

Laws specifying the two major types of taxes levied on distilled spirits – “specific excise taxes” (taxes levied on the quantity of a beverage) and “ad valorem excise taxes” (taxes levied on the price of a beverage).

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Policy Description

(Period Covered: 1/1/2003 through 1/1/2014)

This policy topic covers laws specifying the two major types of taxes levied on distilled spirits – “specific excise taxes” (taxes levied per gallon at the wholesale or retail level) and “ad valorem excise taxes” (taxes levied as a percentage of the beverage’s retail price).

Note: The secondary literature and the laws and regulations related to this policy topic use a variety of terms that are sometimes used in different ways by different jurisdictions. To see definitions for these terms as they are used in APIS, see the Definitions heading below.

General Information

This policy addresses distilled spirits taxes, one of three types of beverage taxes included in APIS (in addition to beer and wine taxes). Although some States have separate tax rates for other types of alcoholic beverages (e.g., sparkling wine), these beverages constitute a small segment of the market and their tax rates are not addressed by APIS.

State alcohol taxes fall into four main categories. The names applied to these categories may vary by jurisdiction, but the following terms are commonly used:

·Ad Valorem Excise (AVE) Taxes – Taxes levied as a percentage of the beverage’s retail price (which may also be referred to as the percentage of gross receipts, gross proceeds, retail receipts or retail proceeds). Different ad valorem excise tax rates may apply to on- and off-premises sales.

·Sales Tax – A tax on goods in general rather than a tax that specifically applies to alcoholic beverages. APIS provides the sales tax rate only for those States in which: (1) a sales tax does not apply to an alcoholic beverage; and (2) an ad valorem excise tax does apply to that beverage.

·Sales Tax Adjusted Retail Ad Valorem Tax – In some States, AVE taxes are levied in lieu of sales tax. In these cases, an accurate index of the actual tax reflected in the retail price requires that the retail ad valorem excise tax be adjusted to reflect the fact that sales taxes are not levied.

Although not all States impose a tax on sales of goods and services generally, analyses conducted by APIS suggest that these general sales taxes may be a substantial contributor to the total tax imposed on alcoholic beverages in the States that do impose a sales tax. At this time, APIS is only able to provide the sales tax rate for those States in which (a) a sales tax does not apply to an alcoholic beverage, and (b) an ad valorem excise tax does apply to that beverage. Sales taxes are included in these cases so that the “sales tax adjusted retail ad valorem tax rate” can be calculated. APIS is not currently able to display a change in sales tax (nor an exemption from sales tax) on a beverage in a State which does not impose an ad valorem excise tax on that beverage. For example, a State without an ad valorem alcoholic beverage tax might enact legislation that reduces the State sales tax as it applies to alcoholic beverages, or that exempts alcoholic beverages from the State sales tax. APIS does not include such legislation. Researchers wishing to include sales tax in analyses of alcohol economic availability can find useful State-level data from the following sources: http://taxfoundation.org/article/state-and-local-sales-tax-rates-midyear-2013http://www.salestaxinstitute.com/resources/rates

The Sales Tax Adjusted Retail AVE Tax is calculated by subtracting the Sales Tax from the Retail AVE Tax (see Figure 1). The Sales Tax is only displayed, and this adjustment is only calculated, in States that have both an AVE tax and a sales tax that is not applied to alcoholic beverages. For example, a State may have a 5% sales tax and a 10% AVE tax applied to alcoholic beverages. If the sales tax is not applied to alcohol, then the effective (or adjusted) AVE tax is 5%. This is the same AVE tax rate as a State that has a 5% AVE tax that is in addition to the State’s sales tax. This calculation is not performed for Wholesale Ad Valorem Excise Taxes, since the sales tax is only applied to retail transactions.

Figure 1

Calculating the Sales Tax Adjusted Retail Ad Valorem Excise Tax

(Applicable only in States that do not apply their Sales Taxes to alcoholic beverages)

For beer, wine, or distilled spirits, a given State may have half a dozen or more AVE or SE tax rates that vary based on alcohol content, container size or geographic location. For this policy, taxes are reported for an index beverage, the beverage with the largest market share. This same index beverage is used when calculating standard drink sizes.[1] In addition, if there are different taxes on different container sizes, APIS reports taxes for the most commonly sold container size. See Special Considerations for Spirits Taxes, below, for further discussion of this issue.

Special Considerations for Analyzing Alcohol Beverages Taxes in Control States (States with State-Run Retail and/or Wholesale Systems)

In General

Taxes are not reported for States where the index beverage is available in State-run retail stores or through State-run wholesalers. In these cases, the State sets a price for each alcohol product that is some combination of cost, mark-up, and taxes. It is not possible to determine the dollar value assigned to each of these components. In this policy, States where the index beverage is available in State-run retail stores or through State-run wholesalers will be referred to as “Control States.” The remaining States and the District of Columbia will be referred to as “License States.”

Special Considerations for Washington State Privatization

On November 8, 2011, voters in Washington approved Initiative Measure 1183, which privatized all aspects of the wholesale distribution and retail sale of beer, wine, and distilled spirits. When it took effect on December 8, 2011, Initiative 1183 added a new section to Washington State’s statutes on alcohol sales (Chapter 66.24 RCW) which includes permitting retail licensees to sell spirits in original containers to consumers for off-premises consumption, and to licensees to sell spirits for on-premises consumption. It ended government involvement in beer and wine distribution and sales. (See the Alcohol Control Systems policies for a description of Washington’s beer, wine, and distilled spirits control system prior to the implementation of Initiative 1183.)

Initiative 1183 triggered changes to APIS coding, including the APIS treatment of taxes for distilled spirits, wine, and beer. As discussed above, APIS does not report taxes for Control States, which are those in which the State controls some aspect of the distribution for APIS index beverage(s). As a result of Initiative 1183, APIS changed the treatment of Washington for tax purposes from a Control State to a License State. Taxes are now reported for all three types of beverages beginning on December 8, 2011, when privatization began as a result of passage of Initiative 1183.

Most States calculate taxes based on the alcohol by volume (ABV) of various beverages. A few States calculate taxes based on alcohol by weight (ABW). These measures are not equivalent. APIS converts ABW to ABV for the purposes of reporting taxes.[2]

Scope of the APIS Analysis

APIS does not provide tax data for:

·General food and beverage tax rates (e.g., meal or room service taxes) that may include alcoholic beverages in their definitions.

·Flavored alcoholic beverages, wine coolers, fortified wine, champagne, cider, rice wine (sake), vermouth, and any other alcoholic beverage that does not meet the definition of an index beverage as described above.

·Taxes on shipments directly from producers to consumers if such taxes are in addition to or in lieu of the AVE and SE taxes applied to sales made through retail outlets.

·Optional taxes that local governments (i.e., counties, municipalities) within a State could impose by election or other local rule-making process. However, APIS does include State-imposed taxes that localities uniformly collect.

·“Supplemental” taxes such as those applying to club licenses (unless clubs are the only type of on-sale outlets permitted in the state), or to common carriers (e.g., airlines).

Additional specifications for the scope of the APIS analysis are presented under “Special Considerations” for Beer, Wine, and Spirits Taxes and in the Explanatory Notes and Limitations section.

Special Considerations for Spirits Taxes

There are numerous types of distilled spirits – e.g. rum, whiskey, vodka, etc. They are distinguished from beer and wine in that the alcohol is derived from distillation.

APIS uses spirits of 40% alcohol by volume (ABV) as the index beverage for reporting tax data – i.e., the tax on the alcohol content range that includes 40% ABV is reported in the data tables. Tax rates for other commonly available beverage strengths are reported in the Additional Taxes column.

However, APIS does not provide spirits tax data for:

·Spirits under 15% ABV

·Spirits over 50% ABV

·Containers of 2 oz. or less if there is a tax on these containers that differs from the tax on spirits sold in larger containers

If tax rates vary based on container size, APIS reports the tax rate on 750 ml. bottles. If different tax rates apply to containers of other sizes, these are reported in Row Notes or Jurisdiction Notes.

Note that Federal law establishes a Specific Excise tax rate of $13.50 per “proof gallon” of distilled spirits, and “a proportionate tax at the like rate on all fractional parts of a proof gallon.” See 26 U.S.C. § 5001. A proof gallon is one liquid gallon of spirits that is 50% alcohol at 60 degrees F. APIS converts the Federal proof gallon tax rate to a standard per gallon tax rate for purposes of reporting distilled spirits taxes.

Taxes levied as a percentage of the beverage’s retail price (which may also be referred to as the percentage of gross receipts, gross proceeds, retail receipts or retail proceeds). Different ad valorem excise tax rates may apply to on- and off-premises sales.

Alcohol by Volume vs. Alcohol by Weight

Most States calculate taxes based on the alcohol by volume (ABV) of various beverages. A few States calculate taxes based on alcohol by weight (ABW). These measures are not equivalent. APIS converts ABW to ABV for the purposes of reporting taxes, using the formula ABV = ABW x 1.25. In the data tables, APIS refers simply to percent alcohol.

Alcohol Control System

The laws and regulations of a State that specify who may distribute alcohol beverages. These laws and regulations may apply to the wholesale level, the retail level, or both.

Beverage Type

Major classifications of alcoholic beverages (based on ingredients or methods of production). The APIS analysis of Alcohol Beverages Taxes considers three beverage types: beer, wine, and distilled spirits.

Index Beverage

Beer, wine, or spirits of a specified alcoholic content (5% ABV for beer, 12% ABV for wine, and 40% ABV for spirits). Beverages are most commonly sold in these strengths.

License System

A system in which a State licenses private vendors to operate wholesale or retail systems of distribution of an alcoholic beverage type—also called a private system.

Off-Premises Sales

Retail sale of sealed containers of alcoholic beverages for consumption somewhere other than the premises where the beverages are purchased.

On-Premises Sales

Retail sale of alcoholic beverages for consumption on the premises where the beverages are purchased (e.g., bars, restaurants).

Retail

The sale of alcoholic beverages directly to consumers.

Sales Tax

A tax on goods in general rather than a tax that specifically applies to alcoholic beverages.

Sales Tax Adjusted Retail Ad Valorem Tax

The retail ad valorem excise tax minus the sales tax. Applicable only to States in which sales tax does not apply to alcoholic beverages.

Specific Excise Taxes

Taxes levied per gallon at the wholesale or retail level.

State-run (Control) System

An alcohol control system for wholesale and/or off-premises retail distribution of an alcoholic beverage type in which a State sets the prices of and gains profit/revenue directly from wholesale and/or retail off-premises sales (rather than solely from taxation). A State may set prices or directly gain profit/revenue either by owning and operating the wholesale business or retail store itself or by contracting with a private vendor while maintaining control over pricing and profits through the contractual relationship. In the latter case, the private contractor may be paid a fee or commission. State-run alcohol control systems are also referred to as monopoly systems, and States with these systems are sometimes referred to as Control States.

State Store

An off-premises retail alcohol outlet operated directly by a State under a State-run system.

Wholesale

The resale of alcoholic beverages obtained from a producer or distributor to a retailer.

1.APIS does not provide data for spirits under 15% ABV or over 50% ABV.

2.A small number of States have different tax rates for small and large distilled spirits producers. In these cases, APIS includes only those taxes imposed on large producers, which are defined as those producing more than 200,000 proof gallons of distilled spirits per year.

3.APIS does not provide data on containers of 2 ounces or less if there is a tax on these containers that differs from spirits sold in larger containers.

Explanatory Notes and Limitations Applicable to All Alcohol Beverages Taxes

1.The following taxes are not addressed by APIS:

·Taxes that apply specifically to flavored alcoholic beverages, wine coolers, fortified wine, champagne, cider, rice wine (sake), vermouth, and any other alcoholic beverage that does not meet the definition of an index beverage. These beverages may have separate tax rates, or jurisdictions may include them as part of another product category, such as beer, wine, or distilled spirits.

·Taxes that apply specifically to sales of cases.

·Taxes on the "use or storage" of otherwise untaxed alcoholic beverages by consumers. These taxes are designed to impose a tax on alcoholic beverages that do not enter a State through normal distribution channels.

·Exclusions, for example, exclusions of taxes on alcohol beverages sold at military establishments.

·Incentives, for example, tax credits to alcohol beverage wholesalers if those wholesalers make certain types of State-favored investments.

·Taxes on raw materials such as fruits used for the production of alcoholic beverages.

·Property taxes that may apply to alcohol beverage manufacturers, distributors, or retailers.

·Taxes on the sale of water, mixers, soft drinks, ice, or other items capable of being combined with alcoholic beverages to prepare a mixed drink.

2.Although not all States impose a tax on sales of goods and services generally, analyses conducted by APIS suggest that these general sales taxes may be a substantial contributor to the total tax imposed on alcoholic beverages in the States that do impose a sales tax. At this time, APIS is only able to provide the sales tax rate for those States in which (a) a sales tax does not apply to an alcoholic beverage, and (b) an ad valorem excise tax does apply to that beverage. Sales taxes are included in these cases so that the “sales tax adjusted retail ad valorem tax rate” can be calculated. APIS is not currently able to display a change in sales tax (nor an exemption from sales tax) on a beverage in a State which does not impose an ad valorem excise tax on that beverage. For example, a State without an ad valorem alcoholic beverage tax might enact legislation that reduces the State sales tax as it applies to alcoholic beverages, or that exempts alcoholic beverages from the State sales tax. APIS does not include such legislation. Researchers wishing to include sales tax in analyses of alcohol economic availability can find useful State-level data from the following sources: http://taxfoundation.org/article/state-and-local-sales-tax-rates-midyear-2013 ; http://www.salestaxinstitute.com/resources/rates

3.APIS does not include statutory or regulatory provisions that provide a lower tax rate for the first, small amount of alcoholic beverage that a manufacturer produces in a given year, with a higher rate applicable to the rest of its alcoholic beverage production. The APIS database only includes the higher tax rate.

4.In cases where States have an alcohol tax that is derived from several statutes, the display reports the total as a single tax and provides citations to the underlying statutory provisions for review.

5.Taxes are not reported for States where the index beverage is wholly or partially sold in State-run retail stores or through State-run wholesalers. In these cases, the State sets a price that is some combination of cost, mark-up, and taxes. It is not possible to determine the dollar value assigned to each of these components. States where the index beverage is wholly or partially sold in State-run retail stores or through State-run wholesalers are called “Control States.” The remaining States and the District of Columbia are called “License States.”

6.Some jurisdictions specify formulae for converting volumes from metric to English measures. APIS does not use these State-specific conversion formulae. Instead, APIS applies the standard formula used by the United States Tax and Trade Bureau ("http://www.ttb.gov/spirits/convtbl.shtml"), which is 1 Liter = 0.264172 U.S. Gallon.

Explanatory Notes and Limitations Applicable to All APIS Policy Topics

State law may permit local jurisdictions to impose requirements in addition to those mandated by State law. Alternatively, State law may prohibit local legislation on this topic, thereby preempting local powers. For more information on the preemption doctrine, see the About Alcohol Policy page. APIS does not document policies established by local governments.

In addition to statutes and regulations, judicial decisions (case law) also may affect alcohol-related policies. APIS does not review case law except to determine whether judicial decisions have invalidated statutes or regulations that would otherwise affect the data presented in the comparison tables.

APIS reviews published administrative regulations. However, administrative decisions or directives that are not included in a State's published regulatory codes may have an impact on implementation. This possibility has not been addressed by the APIS research.

Statutes and regulations cited in tables on this policy topic may have been amended or repealed after the specific date or time period specified by the site user's search criteria.

If a conflict exists between a statute and a regulation addressing the same legal issue, APIS coding relies on the statute.

A comprehensive understanding of the data presented in the comparison tables for this policy topic requires examination of the applicable Row Notes and Jurisdiction Notes, which can be accessed from the body of the table via links in the Jurisdiction column.

Federal Law for Alcohol Beverages Taxes

(Policies in effect on: 1/1/2014)

The 21st Amendment to the Constitution of the United States provides each State with the primary authority to regulate the sale and distribution of alcoholic beverages within its borders. Courts have provided varying interpretations of the extent of this authority, particularly its interaction with the Interstate Commerce Clause of the Constitution. For more information about the 21st Amendment and the Interstate Commerce Clause, see the About Alcohol Policy section of the APIS Web Site.

The Federal Government imposes volume taxes on beer, wine, and distilled spirits that are in addition to State alcohol beverages taxes.The tax rates and relevant statutory or regulatory citations appear in the row labeled "US" at the bottom of each table.